Rudi's View | Apr 10 2020
This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL
Dear time-poor reader: Cheap Quality stocks and Conviction Calls for (re)building portfolios
In today's Rudi's View:
-Joke Of The Day
-Higher, Lower; The Public Debate Continues
-Great Businesses For Sale
-It's Dividend Cuts Galore
-High Quality Shines
-The Mighty 23
Joke Of The Day
It is a slow day in an old outback town and streets are deserted. Times are tough, everybody is in debt, and living on credit.
A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.
As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.
The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.
The hooker rushes to the hotel and pays off her room bill with the hotel owner.
The hotel proprietor then places the $100 back on the counter so the traveller will not suspect anything.
At that moment the traveller comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.
No one produced anything. No one earned anything…….
However, the whole town is now out of debt and looks to the future with optimism.
*And that, ladies and gentlemen is how a Stimulus package works*
Higher, Lower; The Public Debate Continues
By Rudi Filapek-Vandyck, Editor FNArena
It's a Bear Market but this doesn't mean all the fun remains reserved for the more bearish experts and commentators. Thus far in April, it's the Bulls who seem to have all the fun, or at least the upper hand in the share market.
Market strategists at UBS have tried to shed more light on that eternally important question, post day-to-day optimism and despair: what will earnings growth look like and what should investors be prepared to pay for it?
A six months hibernation for Australia translates into a fall in average earnings per share (EPS) of around -35%, estimates UBS. While downgrades to estimates have been accelerating over the past two-three months, the expected retreat is still no more than -3% or so, note the strategists. Clearly analysts are not yet prepared to go all the way down that rabbit hole.
-30% or so, excluding capital raisings, is the number investors are looking for in case they were wondering what happened during the GFC. Back then banks didn't reduce dividend payments until 2010, when all the bad news had been left behind and Australia had technically escaped a recession on the back of the Rudd government's timely spending program.
This time the support measures announced by the Morrison government won't be enough to hold off the 2020 economic recession, even though this year's stimulus program will end up being multiple times larger. It goes without saying, this time around the problems are a lot bigger, and more complex too.
Economists at the above mentioned UBS recently calculated Australia's GDP might have already printed a negative outcome in the March quarter. That's on the back of the bushfires, but with social distancing and corporate hibernating only just having started. But I digress.
The market's average Price-Earnings (PE) ratio during Bear Markets and economic recessions in Australia usually sinks to 16x at the trough, but UBS sees multiple reasons as to why "this time should be different".
For starters, and I personally will definitely remember this one, CSL ((CSL)) is now the market's largest constituent and it is casually trading on above-average PE multiples. Insofar that UBS calculates CSL alone adds 100 basis points to the market's average PE multiple.
So on a apples-for-apples comparison with trough multiples from the past, this year's PE for the Australian share market should not fall below 17x.
But then, that's considered too low as well, given multiple supportive factors in play:
-interest rates are exceptionally low plus central banks, including the RBA, are adding unlimited QE
-governments, including in Australia, are launching extremely large fiscal stimulus programs (and we most likely haven't seen the end of it)
-the recovery from the economic recession is likely to be quicker given the above
At face value, the local share market is now trading on a PE multiple below the 14.4x long term average, though that is changing rapidly as the market continues to add more gains with every day passing. By mid-week, UBS estimated the market multiple had risen to 14.7x, above the long term average.
However, if we take guidance from UBS's -35% trough-forecast, then the real PE for the market is 22x. The strategists have added in an extra 5% in capital raisings. In other words: this market is not cheap at all.
Hope springs eternal?
On Monday, in my Weekly Insights, I highlighted how deep recession forecasts among economists are currently clashing with much more benign adjustments made by stock analysts, both here as well as in the USA. Only one of these two diverging estimates can be correct, one presumes.
Which is why the upcoming quarterly results reporting in the US could become quite important. We know the economic data will be awful from here onwards, but because of the built-in delays, they still won't show us the true extent of what is occurring on the ground. Maybe US companies can provide investors with more detailed insights?
In the meantime, UBS's Model Portfolio is sticking with a defensive bias, preferring stocks like APA Group ((APA)) and Aurizon Holdings ((AZJ)), Woolworths ((WOW)) and a2 Milk ((A2M)), as well as CSL and ResMed ((RMD)). The Portfolio doesn't like discretionary retailers or "Other Financials".
Probably fair to say other market participants and forecasters are hoping Australia's lockdown will last a lot shorter than the six months in UBS's projections, which should also keep the overall damage a lot less.
To read some of the other forecasts, this week's Weekly Insights "How Deep, How Long, How Far?" was published on the website on Thursday morning, 8 April 2020:
Great Businesses For Sale
The Australian share market offers exposure to a number of Great Businesses, exclaimed analysts at Wilsons recently. I could not agree more with that statement.
In line with my own recent writings, Wilsons is of the view investors should use this year's opportunity (Bear Market) to obtain exposure to those Great Businesses. They'll thank themselves for it in years to come.
Wilsons has lined up the following Great Businesses on the ASX that today can be added to portfolios at much cheaper share prices:
-BHP Group ((BHP))
-Rio Tinto ((RIO))
-Aristrocrat Leisure ((ALL))
-JB Hi-Fi ((JBH))
-Magellan Financial ((MFG))
-Macquarie Group ((MQG))
-Goodman Group ((GMG))
Those familiar with my own research and market analyses will notice a large overlap with my selection of All-Weather Performers, which can be accessed via the website:
It's Dividend Cuts Galore
It started raining dividend reductions in 2019, remember? Australia was one of few countries that saw total dividends paid to shareholders contract on a twelve months view.
The more optimistic market participants believed it would prove a one-off despite a shaky looking economic environment. We will never know as the covid-19 pandemic and related recession have put all doubts aside: Australia is in a deep dividend recession.
2020 is going to end up a lot worse than 2019, that much already is a certainty.
What about resources stocks? Can they remain a beacon of hope amidst dividend deferrals, reductions and removals that are now taking place on an almost daily basis on the Australian share market?
Analysts suggest the odds are that both BHP Group and Rio Tinto might opt for the more prudent approach too, but both should still maintain relatively high payouts, potentially without any more buybacks and bonuses, for the time being.
Company boards still have a few months ahead of them before making decisions, but the resources research team at UBS has nevertheless decided to lower dividend forecasts for Newcrest Mining ((NCM)), Fortescue Metals ((FMG)), Whitehaven Coal ((WHC)) and Coronado Global Resources ((CRN)), and also for BHP.
High Quality Shines
A Bear Market does not treat every stock in the same fashion, compare NextDC with Ardent Leisure for example, but plenty of High Quality businesses see their share price fall nevertheless. This is when savvy investors receive an invitation to grab the Bear Market opportunity.
Morgan Stanley has a long-standing tradition for keeping a watchful eye on the Higher Quality names in global markets, but unfortunately for Australian investors, its research never includes Australian shares, not even CSL (which does appear on other offshore experts' lists).
Cyclical "value" stocks will eventually lead the market higher when the current economic and healthcare misery have been put to bed, report the analysts, but there is still sufficient uncertainty out there to add more of the Quality companies whose share price has equally weakened.
As said, no ASX-listed stocks are on the analysts' radar, with the list of suggestions instead pointing towards Adobe, Alibaba Group, Alphabet (Google's parent), Apple, Mastercard, Microsoft, Schneider Electric, TSMC, Nike and Vivendi instead.
The colleagues at RBC Capital recently updated their Top 30 Global Ideas to own in 2020, and here we do have one Australian representative, in a Russel Crowe sort of way, since New Zealand born Xero ((XRO)) remains included. RBC Capital's list has some overlap with the Quality assessment from Morgan Stanley but it's selection is far less Wall Street-oriented.
Among the RBC chosen ones we find Barrick Gold, Crowdstrike Holdings, Diageo, Gilead Sciences, ING Groep, LVMH, Pfizer, Siemens, Visa and -acquired taste no doubt- Uber Technologies.
RBA Capital keeps a separate list specifically for Global Mining Ideas and here the focus has shifted to precious metals and fertilisers. Interestingly, portfolio weight for bulk commodities has been scaled back, as too happened to base metals. Australian representatives in this sector are BHP Group among the bulks, IGO ((IGO)) for base metals, and Gold Road Resources ((GOR)), Kirkland Lake Gold ((KLA)) and Saracen Mineral Holdings ((SAR)) in gold. Northern Star ((NST)) was included earlier but has now been removed.
Analysts at Jefferies equally compiled a list of what they regard are the strongest businesses franchises in Asia. Here too, we find a number of ASX-listed names; CSL, Goodman Group, Macquarie Group, Rio Tinto, Transurban and Woolworths are standing side-by-side with Alibaba Group, Kweichow Mouta-a, Tencent, Tata Consultancy, Nintendo, and Sony Corp.
Market strategists at stockbroker Morgans simply refuse to darken the mood, instead cheering up their clientele with evergreen declarations such as "no crisis lasts forever" and "what has worked over the past 12-18 months will not suffice in an environment that has raised more questions than answers".
Morgans is hopeful the worst of the global pandemic should be over in a few months' time, after which economies can start their healing from the lockdowns and the virus casualties.
On that note, the strategists observe the ASX200 index seems to be finding support in the vicinity of 4,800, which was the support level in the selloff in 2016 and the peak of prices in 2011. At that level, Morgans is willing to stick its neck out and declare the Australian share market undervalued on a long-term view.
On that basis, Morgans has a clear preference for Defensives such as consumer staples, healthcare, telcos and infrastructure and utilities. Favourite names include Coles ((COL)), Freedom Foods ((FNP)), a2 Milk, Sonic Healthcare ((SHL)), ResMed, Pro Medicus ((PME)), Telstra ((TLS)), NextDC ((NXT)), APA Group ((APA)), Spark Infrastructure ((SKI)), AGL Energy ((AGL)), Transurban, and Sydney Airport ((SYD)).
A more Neutral stance has been given to Industrials and Resources. Here the favourites are Amcor and Aurizon Holdings, and Rio Tinto, BHP Group, OZ Minerals, Woodside Petroleum ((WPL)) and Beach Energy ((BPT)).
Least preferred segments of the local share market are consumer discretionary and anything financial. Among the consumer stocks, Morgans likes Domino's Pizza ((DMP)), JB Hi-Fi ((JBH)), and Aristocrat Leisure. Among financials, the favourites (or should that be least disliked?) are Westpac ((WBC)), Macquarie Group, and Magellan Financial.
Special Note: Morgans still sticks with its valuation based rankings for banks, of which it believes a lot of bad news still lays ahead. When ignoring valuations and focusing instead on respective assessments of risk, then CommBank becomes most preferred in the sector.
My five cents worth: ignore valuations and consider CBA the best among the best in the sector. Not only will CBA's dividend to shareholders remain the most resilient, its total investment return has proved superior over the past two decades, both during the good times and the bad times. I find it incredibly hard to see how this will change. For this reason alone, I do not understand every analyst and his dog's fixation with "valuation".
CommBank is the superior choice. That's why you pay a premium. Full stop. How difficult to understand is this, really?
Analysts at Morningstar, which many among you will still remember as Ian Huntley's, have identified four industrial companies in Australia that should remain relatively immune amidst covid-19 impact.
On Morningstar's assessment, the global economy is en route for a GDP contraction of -1.5% this calendar year, hence a robust and reliable business model cannot possibly be valued enough in such an environment.
The analysts preference lays with defensive revenues, undeniably strong balance sheet metrics and preferably accompanied by some sort of economic moat and a still undervalued share price. As such, the analysts have chosen Amcor, Brambles ((BXB)), Orora ((ORA)), and Cleanaway Waste Management ((CWY)).
Technology analysts at Credit Suisse readily admit the local sector will not prove immune from covid-19 disruption, but overall, predict the analysts, most local tech names should be able to report comparatively stronger results in the coming reporting cycles than many other segments of the share market.
Macquarie has been advocating investor portfolios retain a defensive bias while the world tries to figure out how exactly this year's pandemic will play out and impact on the global economy.
Macquarie's 14 best ideas for the forthcoming recovery are:
-Cleanaway Waste Management
-Harvey Norman ((HVN))
-Northen Star Resources
-Medibank Private ((MPL))
-Pushpay Holdings ((PPH))
-Steadfast Group ((SDF))
The Mighty 23
Richard "Coppo" Coppleson wrote himself into local legendary status when at Goldman Sachs. He has found a second career at Bell Potter nowadays where he still produces a daily end-of-the-day market summation that is still popular around the tarps, and beyond.
This week The Coppo Report revealed there were 23 stocks in the ASX200 whose share price is up since January 1st. Those 23 names are:
-Fisher & Paykel Healthcare ((FPH))
-Saracen Mineral Holdings
-Evolution Mining ((EVN))
-Silver Lake Resources
-TPG Telecom ((TPM))
-Costa Group ((CGC))
-Bega Cheese ((BGA))
-Gold Road Resources
-AusNet Services ((AST))
-Spark New Zealand ((SPK))
-Pro Medicus ((PME))
The list provides a nice overview of what the market has decided is solidly defensive in the current pandemic plus economic recession context: food, cloud and communication, (parts of) healthcare, (certain) utilities, and gold miners.
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
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